Pros and Cons of Getting a Working Capital Loan

Working capital is a great way for companies to generate capital and start focusing on business growth. To get anywhere in the business world, it is extremely important to have the capital on hand to cover the costs of marketing, payroll and other financial expenses that occur within the daily operations of your company.

How to use working capital?

Working capital is the money available to operate the immediate and short-term needs of your company. Its capital is often in the form of money in the bank or redeemable notes. And often a small business may not have enough working capital to keep it running until it reaches break even.

Although you may have been successful in the past to secure some form of financing to start your business business and establish a solid customer base, access to the working capital needed to fund growth can often become a hindrance for many entrepreneurs in any moment.

Many small business owners can turn to their own personal resources to meet their financial business needs. Although it sounds like a good idea at first glance, a better idea might be to use a working capital loan to keep your company’s money separate from your pocket as well as meet your needs with money to spare. As the name suggests, working capital loans are intended to finance daily expenses (such as salaries of paying employees) related to the daily operation of a business. It is not intended to be used for things like investing or buying long-term assets.

What is working capital?

As a business grows, it starts tying up a lot of money in the day-to-day operations of the company that has nothing to do with its profits or losses. This type of cash consumption is called working capital. In accounting terms, working capital is equal to current assets minus current liabilities. In popular terminology, working capital is what your customers owe you plus any inventory you have built less than you owe to your suppliers and employees. Working capital also includes any money you have in the bank. It’s the money you put to “spin” that is easily accessible.

Without planning, getting a working capital loan just helps your business sink further. (Photo: capitalloans.com)

What is the working capital loan?

A working capital loan is a type of specialized loan that is awarded to companies and designed to meet the daily financial needs of running a business. Unlike traditional business loans that are designed for specific purposes, with a working capital loan your business is not required to submit the purpose of the loan to the lender during the application process, they will approve the loan regardless of how the money is being used. Working capital loans are typically not used to buy assets or for long term financing, it is a short term business financing option offered by the lenders.

For what purposes should we use a working capital loan?

The list of things for which you should not use the loan for (asset purchase, long-term financing) is much smaller than the things for which working capital was made. Although the situations may be different, the goal is to increase working capital. There are a number of different options according to the needs of your business.

Maybe you know that you will have a number of less profitable months during the year, you can use the loan to meet your payroll or other recurring payment obligations during those months. Or, maybe you need to stock up on inventory before the holiday season arrives and you do not have enough money on hand. In the same vein, the loan may allow you to be able to take advantage of the discounts on purchases that are offered to you by the suppliers.

Small businesses use these short-term loans to cover unexpected losses as well. Maybe you have increased expenses due to additional marketing efforts, new employees or a change of office. Or it’s time for you to upgrade, upgrade or remodel your office space or current product lines. Maybe the economy has led you to have an additional slow growing number of paying customers and you need to make funds. And it is possible that some recent operating losses may have reduced or depleted your cash reserves.

In other words, for just about any business looking for some quick financing, a working capital loan is definitely a great option to consider.

Advantages of a Working Capital Loan

You are prepared to deal with any financial difficulties that may arise. Even a company that has billions of dollars in fixed assets quickly finds itself in bankruptcy court if it can not pay its monthly bills. In the best of circumstances, lack of working capital leads to financial pressure on a company, an increase in indebtedness and delays in paying creditors, all of which result in a mistrust of the market. The higher risk means that banks can charge a higher interest rate for any borrowed money. Applying for and using a working capital loan when you need it most will keep you in business when financial problems occur.

You can and will maintain ownership of your company. If you were to receive funding from an investor, you probably have to give a generous percentage of your company in return. In turn, you are giving a portion of your decision-making ability as well. But, if you take out loan from a bank or other financial institution, you are required to make the payments agreed on time. But that is the end of your obligation to the lender. You can choose to continue your business the way you choose without external interference.

No guarantees required. In general, there are two types of loans, secured and unsecured. Working capital comes in both flavors, though many are unsafe. Guaranteed working capital loans are given only to small businesses that have a good track record of payments and / or have little or no default risk. If you are lucky enough to qualify for an unsecured loan, you will not need to put your business, inventory, or anything else to secure the loan. Of course, repaying the loan back is critical because they will come after you.

Shorter time limits for short-term problems. Working capital loans are designed to help with infusing money into your business for the short term. A little something here, another there, and a much-needed injection of money. You do not have to plan for years of monthly payments to pay back what you borrowed.

You can use the money as you see fit. Banks and lenders have little or no restriction on how you use the money. They just want you to use the money to keep your operations or to do things that will increase your revenue opportunities. This works well because as a smart businessman, it is exactly what you want to do with the money as well.

Fast! Applying for a typical business loan or personal loan can take up a lot of your precious time, and may not end in approval. What’s the point of going through an excessive bureaucracy, a lengthy approval process, placing collateral, personally securing the loan, making fixed monthly payments, and having restrictions on how you use the money if your application is only going to be denied? A working capital loan is a great way to get cash fast and without the hassles associated with a traditional bank loan. These loans allow borrowers to access the money almost immediately, usually within a week after the application is accepted.

Disadvantages of a Working Capital Loan

Refund. Yes, you really have to repay the loan. This is usually a fact when you borrow money. As with any type of loan, the only obligation with the lender is to make your payments. Unfortunately, even if your business fails, you will still have to make these payments. And if you are forced to file bankruptcy, your creditors will be entitled to repayment before any investors.

Some warranties required. Many working capital loans require a certain degree of security for the lender. In today’s economy, a bank would like some assurance that you will pay it back. A secured loan is one in which the collateral is received in exchange for financing. The warranty can be something like a factory, home, inventory or even jewelry. These items can also be given as collateral, even if there are mortgages on them. Although the amount of collateral for a working capital loan may vary according to the banks, most often look at information such as history with the bank and other information to see your credit repayment history.

Higher interest rates. As unsecured working capital loans are riskier for lenders, they generally include higher interest rates than secured commercial loans. This means that your company will pay more over the life of the loan than it would have paid for a secured loan in the same amount. Higher interest rates also make individual loan payments larger and sometimes harder to bear. Finally, unsecured business loans are harder to qualify for. If your company has a bad or nonexistent relationship with your bank or financial institution, the lender may not approve your request.

Potential impacts on your relationship with the bank. It may seem like a good idea to take out loans when your small business needs money, but every loan will be written down in your relationship. And the more you ask, the greater the risk to the lender, and the higher the interest rate you will pay. Also, slow payment or no payment will be harmful, so it is necessary to make sure that you will be able to pay any money borrowed.

Short deadlines. Yes, this is a benefit and a disadvantage based on your business needs. The major disadvantage of getting funds from this type of loan is the fact that the financing is intended only for short term solutions. These loans will not be enough for long term business goals or comprehensive business projects, which will have larger investments with longer repayment terms.

Banks sometimes lend money in the short term to small businesses that allow them to get off the ground and grow. Working capital is a great way for companies to generate capital and start focusing on growing the business. To get anywhere in the business world, it is important to have the capital on hand to cover marketing costs, payroll, and any other financial expenses that occur within your business. Instead of exhausting all your finances to meet your financial needs, use a working capital loan to keep the money in your pocket as well as meet your needs with money to spare.

Are you ready to see what your business could do with a working capital loan?

A working capital loan is one of the easiest ways to fully exploit the potential of your business. If you are in a solid financial position but just need a little extra help to make this expansion necessary or find that extra employee that can give your business a start, why not consider what one of these loans can do for you? With correct payment planning and access to credit lines with lower interest rates, such as BNDES credits, you can easily plan the loan repayment in your business plan and recover your company.

Working capital can also be obtained from other sources, such as angel investors. But as we said earlier, it can be tricky to involve another person in your business. Despite all the possibilities, make a good financial planning and come back here in the comments to clarify any doubts that may appear during your clarification.